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The 1938 Nonprofit Institutions Act,[1] which expressly permits price breaks on “purchases of their supplies for their own use by schools, colleges, universities, public libraries, churches, hospitals, and charitable institutions not operated for profit” (emphasis added), created a broad exemption (the non-profit exemption) from the general price discrimination prohibition in the Robinson-Patman Act. As the Ninth Circuit Court of Appeals stated in 1967:

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The underlying intent in granting such an exemption was indisputably to permit institutions which are not in business for a profit to operate as inexpensively as possible.[2]

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Two Supreme Court opinions, announced in the mid-1970s and early 1980s, provided significant interpretations of the scope of the nonprofit exemption from the Robinson-Patman Act prohibition. Both involved challenges to the practice of a pharmaceutical supplier who was selling its products to certain hospitals at prices lower than those charged to retail pharmacists in the areas surrounding the hospitals in question.

Abbott Laboratories v. Portland Retail Druggists Association[3] discussed the “for their own use” phrase in the Nonprofit Institutions Act, and interpreted the provision strictly. The Court relied largely on the “for their own use” language to hold that not all purchases made by a nonprofit hospital are necessarily exempt from price discrimination prohibitions. The exemption is applicable only to those purchases made in order to enable the hospital to meet the needs of the hospital (e.g., dispensing to inpatients, outpatients treated in the hospital, emergency room use) and those of staff physicians, medical and nursing students, and their dependents: “The Congress surely did not intend to give the hospital a blank check.”[4] Although the Court included within permissible uses by the hospital, “genuine take home prescription[s], intended, for a limited and reasonable time, as a continuation of, or supplement to, the treatment that was administered at the hospital to the patient who needed, and now continues to need, that treatment,” it specifically excluded from the Robinson-Patman exemption embodied in the Nonprofit Institutions Act “the refill for the hospital’s former patient.”[5] Further, the Court refused to sanction purchases by the hospital-based physician for use in “that portion of his private practice unconnected with the hospital.”[6]

While the primary concern addressed by the Court in Portland was the sale of pharmaceuticals to nonprofit hospitals for all uses, including patient care and resale, four years later, in Jefferson County Pharmaceutical Ass'n v. Abbott Laboratories,[7] the Court set out the limits of the exception to the Robinson-Patman Act for government purchases: Jefferson County presented an issue “limited to state [read “nonprofit hospital”] purchases for the purposes of competing against private enterprise — with the advantage of discriminatory prices — in the retail market.”[8]Jefferson County stressed that Robinson-Patman Act's prohibitions against unjustified discriminatory price differentials in the sale of commodities of “like grade and quality” dictated that government [nonprofit hospital] purchases for use in retail competition with private enterprise, as opposed to those for “traditional governmental [hospital] functions,” are fully subject to the strictures of the Act. The Court held that purchases of pharmaceuticals by the University of Alabama Hospital for uses other than in the treatment of its patients, as, for example, in retail sales, may not be made at prices which would give the University Hospital an unfair price advantage over its competitors in the retail sale of pharmaceuticals.

Health maintenance organizations were found to be “eligible institutions” under the Nonprofit Institutions Act in De Modena v. Kaiser Foundation Health Plan, Inc.[9] After acknowledging that the Act “does not explicitly list HPs [health plans],” and that no case law at that time specifically included HPs as “charitable” institutions, the appeals court relied on “precedent defining the term charitable for purposes of the tax code and the law of charitable trusts” to reach its conclusion: “[T]he emergence of social welfare, insurance, and municipal hospitals [has] drastically reduced the number of poor requiring free or below cost medical services”:

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This reduction eliminated the rationale upon which the traditional, limited definition of charitable was predicated, resulting in a move towards a less restrictive interpretation of the term in recent years. Now all non-profit organizations which promote health are considered charitable under the law of charitable trusts. Further, a number of courts have specifically held that health maintenance organizations, such as HPs, are charitable institutions for tax purposes. . . . Given this increasingly liberal interpretation of the term, we conclude that the [defendant] HPs are charitable institutions within the meaning of the Nonprofit Institutions Act.[10]

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Further, the court relied on the expression of the “for their own use” criterion propounded by the Supreme Court in Abbott Laboratories v. Portland Retail Druggists[11] to decide that the “basic institutional function” of a health plan—providing a “complete panoply” of health-care services, including continuing and preventative services, to its members — requires that “drugs purchased by an HMO . . . for resale to its members [be considered as] purchased for the HMO’s ‘own use’ within the meaning of the Nonprofit Institutions Act.”[12]

De Modena was endorsed in 1995 by the United States District Court for Northern Illinois:

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In De Modena the Ninth Circuit resolved to ‘follow the true mandate of Abbott ... by determin[ing] the basic institutional function of [the HMO in issue] and then decid[ing] which sales are in keeping with this function.’ De Modena, 743 F.2d at 1393. The court began its analysis by recognizing that the intended institutional operation of an HMO is to ‘provide a complete panoply of health care to [its] members.’ Id. The court further observed that, unlike the ‘temporary and usually remedial’ care that fee-for-service hospitals provide to their patients, HMOs ‘provide continuing and often preventative health care for their members.’ Id. Thus, concluded the De Modena court, ‘any sale of drugs by an HMO to one of its members falls within the basic function of the HMO’ and, therefore, constitutes ‘own use’ within the meaning of the Nonprofit Institutions Act. Id.[13]

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To our knowledge, the inclusion of HMOs in the list of entities entitled to take advantage of the “for their own use” language of the Nonprofit Institutions Act has not been judicially repudiated,[14] although the Supreme Court has not yet provided an opinion on the subject.

↑Logan Lanes, Inc. v. Brunswick Corp., 378 F.2d 212, 216 (9th Cir. 1967), cert. denied, 389 U.S. 898 (1967). Cited with approval by the Court of Appeals for the Seventh Circuit in Champaign-Urbana News Agency, Inc. v. J.L. Cummins News Co., Inc., 632 F.2d 680, 692-93 (7th Cir. 1980), aff'g, 479 F. Supp. 281 (E.D. Ill. 1979). The Seventh Circuit also noted in its discussion at that point that, as is the case with a seller who unknowingly sells at a discount to a “lying buyer,” “if a particular purchase is exempt from liability [by virtue of the exemption in the Nonprofit Institutions Act] . . . both the seller and the purchaser in the transaction are exempt.”

↑“[T]heir ‘own use’ is what reasonably may be regarded as use by the hospital in the sense that such use promotes the hospital’s intended institutional operation in the care of persons who are its patients.” 425 U.S. at 14 (emphasis in original).

↑743 F.2d at 1393. In a note, the court expanded its reasoning on the difference between the Nonprofit Institution Act’s treatment of prescription refills by hospitals (prohibited) and drug sales to members by HMOs (permitted): refilling prescriptions goes beyond “the basic institutional function of a fee-for-service hospital [which] is to provide temporary medical care for its patients . . . .” Id. at n.7. The Court of Appeals for the Tenth Circuit further expanded on that reasoning when, in United States v. Stewart, 872 F.2d 957 (10th Cir. 1989), it refused to let a criminal defendant in a mail-fraud case argue that he had not defrauded or legally injured certain manufacturers because one of his problem sales was made to a hospital buying group that included a member entitled to receive discounted prices: “it is clear that the large-scale sale of pharmaceuticals at a profit to wholesalers in the private market is not for the ‘own use’ of a hospital buying group.” Id. at 961.

↑The Federal Trade Commission, in February 2008, took the position that an HMO which covered a self-insured employer’s employees, albeit on a fee-for-service basis, could avail itself of the “for their own use” language in the Nonprofit Institutions Act in order to purchase and sell discounted pharmaceuticals: “This letter responds to your request on behalf of Kaiser Foundation Health Plan, Inc. for an advisory opinion on whether, under the Nonprofit Institutions Act (‘NPIA’) exemption to the Robinson-Patman Act, Kaiser may lawfully purchase discounted pharmaceuticals for use in connection with a proposed program to provide health care services to persons covered under health benefits plans offered by self-insured employers (the ‘proposed program’). . . . it is our opinion that the NPIA exemption would apply to pharmaceuticals purchased by Kaiser for use in connection with its proposed program. We therefore would not recommend that the Commission not challenge under the Robinson-Patman Act the purchase or sale of discounted drugs for use in that program, if implemented consistent with the discussion below.” Advisory Opinion, Re: Kaiser Foundation Health Plan, Inc., Issued by the Federal Trade Commission, February 13, 2008, reported at 94 Antitrust & Trade Reg. Rep. 161 (Feb. 15, 2008).